Legislature, Inslee face financial and political dilemmas

Washington State Capitol Credit: Washington State House Democratic Caucus/Flickr

The gazillion-dollar question: How much money does Washington's state government really need in 2013-2015?

The follow-up question: Where's that money gonna come from?

Those two questions could tie up the state Legislature for months. In fact, numerous other questions are spinning off from these two. Washington faces a complicated budget shortfall for 2013-2015 — the bulk due to the need to fix the state's education funding woes.  That because the Washington Supreme Court ruled a year ago that the state is not meeting its constitutional obligation to adequately fund education — a problem that Gov.-elect Jay Inslee, legislative Democrats and legislative Republicans have different ideas on how to fix.

When the legislative session begins Jan.14, several factors will come into play as the Legislature deals with its latest budget crisis.  Here is a rundown:

  • Without considering any education matters, the state's 2013-2015 operating budget is expected to be in the $33 billion to $34 billion range with revenues initially expected to be about $900 million to $1.375 billion short of expenses. Inslee's proposed 2013-2015 operations budget has not been unveiled yet.
  • Republicans and Democrats cannot agree on how much the state should do to meet the state Supreme Court's education ruling. Republicans are looking at roughly $924 million worth of education fix-it work in 2013-2015. Democrats are looking at $1.4 billion to $1.6 billion worth. Democrats want to tack on more money for teachers' and administrators' salaries than Republicans do. Plus they want to allocate more funds than Republicans to adding more class hours and high school credits. The Republicans' stance is that the Democrats want to spend more money than the Supreme Court requires. Inslee has not yet unveiled his education fix-it plan other than arguing that an improved economy can take care of the problem.
  • Higher education lurks as another costly problem — one without help from a Supreme Court ruling. Tuitions are climbing and Washington students are being shut out from state colleges. Meanwhile, Rep. Larry Seaquist, D-Gig Harbor and chairman of the House's Higher Education committee, is working on an estimate of what the state needs extra to fix higher education. An actual figure won't be ready until mid-January, but Seaquist speculated it could be around $625 million.

Seaquist argued that higher education — four-year colleges, community colleges and tech schools — is a much-needed part of curing Washington's economic woes. And citing 2009 figures from the international-oriented Organization for Economic Co-Operation and Development, Seaquist contended Washington lags behind the world and the rest of the United States in post-high-school degrees. Many industrial nations have at least 40 percent of their young adults— ages 25 to 34 — holding post-high-school degrees with Canada, South Korea and Japan breaking the 50 percent mark. The U.S. figure is 40.4 percent and Washington's figure is 40 percent for that age bracket.

Seaquist finds it significant that 38.5 percent of Americans ages 55 to 64 have post-high-school degrees, while 44.6 percent of Washingtonians in the same age group have post-high-school degrees. Washingtonians in the 35-to-54 age brackets have post-high-school-degree percentages of 41.3 percent to 43.6 percent. Seaquist's bottom line to increase higher education dollars is that Washington's adults 25 to 34 are less likely to have post-high-school degrees than the state's older adults. This is the reverse of the trend in the industrial nations analyzed by the OCED.

  • Rumblings are emerging about a possible need to add one extra 144-car ferry beyond the two already on the state's construction books. A 144-car state ferry is currently being built for $147 million.
  • Legislative Democrats argue tax increases are needed. Inslee and legislative Republicans have ruled out any tax increases, although Inslee has not specifically ruled out eliminating tax cuts due to expire soon. If education gets top priority, that leaves health, social services, natural resources and corrections to absorb hundred of millions of dollars worth of cuts under a no-new-taxes approach.

Democrats have floated trial balloons of taxes on carbon emissions, capital gains, gum, candy and soda and a wholesale fuel sales. A 5 percent capital gains tax on more than the first $10,000 in earnings could raise $650 million to $1.4 billion a year. Expiring taxes that could be renewed include a beer tax, a hospital beds tax and a 0.3 percent business and occupation services surcharge — measures that could raise $650 million to $912 million a year.

  • All sides are talking about closing some tax exemptions, with current proposals ranging between tackling yet-to-be named breaks that tally $63 million to $250 million annually. Republicans usually equate closing tax exemptions to raising taxes — a no-no in their political philosophy. And despite their rhetoric, Democrats have made few attempts in recent years to actually close tax exemptions.

At the same time, the Legislature and Inslee have made job creation another high priority, a venture that usually uses tax breaks to attract new businesses. In fact, Inslee wants to create short-term tax breaks for to start-up biotech and information technology ventures, plus tax credits for aerospace manufacturing and research businesses. "All the tax incentives that Gov. Inslee passes in 2013 will be seen as loopholes in 2015," said Richard Davis, president of the conservative-leaning Washington Research Council at a Dec.13 conference in Seattle held by the more liberal-leaning Washington Budget & Policy Center.

  • Democrats are looking at shifting $300 million in school transportation costs to the House's and Senate's transportation committees, which would make their jobs harder in putting together transportation funding packages that are frequently cited as job-creation vehicles.
  • So far, a few hundred million dollars worth of budget cuts have popped up in a couple Democrat proposals — with no actual details on what would be trimmed. "I think the low-hanging fruit was taken care of years ago. All that left is the coconuts," Davis said.

The total budget shortfall will likely be $2.5 billion to $3 billion, speculated Rep. Ross Hunter, D-Medina and the House Democrats' chief budget writer, at the Dec. 13 conference. He said filling in the budget shortfall without finding new revenue sources is impossible. "You can't do it," Hunter said. 

Meanwhile, the political landscape has changed in the Legislature, which will affect the upcoming budget battles.

First, a two-thirds majority is needed in both the Senate and House to pass a tax increase. Tax-unfriendly Republicans make up more than one-third of each chamber, making tax increases almost impossible. However, the Washington Supreme Court is expected to rule soon on whether that two-third's majority requirement is constitutional. If it is unconstitutional, Democrats would theoretically be able to pass tax increases with simple majorities.

But two Democrats — Sens. Rodney Tom, D-Bellevue, and Tim Sheldon, D-Potlatch -— formally joined the Senate's 23 Republicans to create a formal 25-member alliance and a one-vote anti-new-tax majority in the Senate. That sets up a potentially huge rift in dealing with the state budget woes between the Democrat-controlled House and the Republican-oriented Senate.

For its part, the House has just split its Ways & Means Committee into two separate committees. Former Ways & Means chairman Hunter will chair the new House Appropriations Committee. Rep. Reuven Carlyle, D-Seattle, will chair the new House Finance Committee, which will be in charge of finding new revenues.

Carlyle argues that researching effective revenue sources — examining new taxes, studying existing taxes plus analyzing granting and closing exemptions — has received token attention in Olympia. As a legislator, Carlyle said, "My biggest shock and frustration and discomfort is on the lack of intellectual rigor on the tax and income side."

For example, Carlyle sees very little information on whether specific tax exemptions actually help the economy. He wants to install automatic expiration dates on all tax exemptions with return-on-investment studies done on each before it can be renewed.

That raises big-picture questions on what Washingtonians want their government to provide. "Do we want the lowest tax rates and the lowest [level of] services … or moderate taxes with premiere services?" Carlyle said.

At the Dec.13 conference, Hunter said: "Building an economy is not just based on low taxes. If that is so, then Uzbekistan would win."

On his blog, Carlyle recently wrote: "Washington state ranks 28th in the nation in combined local and state tax obligations. At 9.3 percent of income, according to the generally conservative, but well-respected Tax Foundation, it is easy to make a policy case that this is not a wildly unreasonable burden. In 1977, Washington ranked 31st in the nation with a 9.6 percent of income level of taxation. A never-ending, parallel political question, of course, is where citizens are receiving value for their precious tax dollar."

Carlyle does not have any specific tax increases or tax exemptions in mind to send to the full House, but wants all options examined. He said, "I don't have an intended outcome in mind. … My mission is to present a robust menu" of revenue options to the House.

Politically, Washingtonians have sent mixed signals — wanting state government to tackle a lot, but not to spend lots of money to do so. "We like to elect liberals on [fiscally conservative] leashes," Davis said.

Matt Barretto, a University of Washington associate professor of political science, said at the December conference that a UW poll of voters in October found that 13 percent of the respondents wanted the budget holes fixed with only tax increases, 40 percent wanted it fixed with only tax cuts, and 37 percent wanted a mix of tax increases and budget cuts.

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